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Arkansas: A tax myth-maker, too 

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Arkansas is not quite the laboratory that the government of the United States has afforded us for testing supply-side economics and other popular tax myths, but our experiment is much older.

The central supply-side tenet is that low or non-existent taxes are the key to unlocking growth, jobs and general prosperity, including plenteous government treasuries, but long before President Ronald Reagan unwittingly shot that idea full of holes, we had tested it in Arkansas for something like a hundred years.

If low taxes were the key, Arkansas would have been an industrial juggernaut by World War II instead of the poorest, most undeveloped state in the land.

President Roosevelt singled out Arkansas in the Great Depression because, alone among the states, it would not raise enough taxes to pay school teachers and other public servants or help the federal government supply the desperate needs of people. Governor Futrell and the legislature had greeted the Depression by slashing spending 51 percent, stopping payment on government bonds, cutting teacher pay and then not paying them at all. When the federal government punished the state's delinquency in 1935 by halting all federal assistance to the people of Arkansas, the governor called the legislature into an emergency session and passed a sales tax and some liquor taxes to avoid what the governor expected to be an overthrow of the government by mobs of the hungry and jobless. Still, no one could touch our low taxes.

Until Gov. Dale Bumpers raised income-tax rates and other taxes in 1971, Arkansas had by far the lowest per-capita state and local taxes in the United States. Afterward, we were still 50th but within shouting distance of 49th.

What happened then? Lo and behold, for three years from the month that Bumpers's taxes took effect, Arkansas attracted more industry and created more jobs than any time since World War II. Frank White and Bill Clinton raised state and local sales taxes and a variety of excise taxes, which earned Clinton the Republican epithet of "the taxing governor." For a while in the late 1980s Arkansas led the country in the percentage growth of industrial jobs.

Then came Mike Huckabee, who raised more taxes by far than any governor in history (practically all of which he now disavows having anything to do with).

History is so perverse. Each round of tax increases was followed by a spurt of economic growth, which is not how Milton Friedman and Arthur Laffer said it would happen.

Huckabee's time is most instructive. In 1999, he slashed taxes on investment profits (30 percent of capital gains would be exempt from income taxes), which he and the chamber of commerce said would unleash investment capital and create thousands of jobs. But it was followed instead by a period of economic stagnation. For 4 years, employment would not return to the level of the month when the tax cut took effect. At the trough of that decline, in 2003, Huckabee had the legislature at two special sessions raise a variety of taxes, including a two-year surcharge on income taxes, a substantial increase in the corporate franchise tax, and new sales and cigarette taxes. In the next three years total employment grew by 94,000.

A simple conclusion would be that raising taxes compels growth and tax cuts depress it. But that is as nonsensical as the opposite theory. A more logical one is that taxes, at least at the relatively inconsequential rates levied by the state and local governments, do not drive investment decisions and that business expansion and job creation depend on all sorts of factors: the quality of the work force, proximity to markets, energy costs, supply, demand, a supportive infrastructure and, well, personal whims.

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